SAFETY

MANAGEMENT
causes of construction site accidents
 Putting costs and work schedules ahead of worker safety is a common factor in many construction site accidents.
 When an employer pushes workers to complete a job in a hurry and at the lowest possible cost, essential safety
precautions may go by the wayside.

Common causes of construction site accidents include:

Lack of fall protection for workers on elevated structures

Lack of protection for people on the ground from falling objects

Tripping hazards from construction materials and debris

Missing guards or protections on power tools

Unsafe equipment

Lack of safety precautions when working near power lines

 Prompt investigation of a construction accident can often uncover violations of
Occupational Safety and Health Administration (OSHA) safety rules.

 Proper Stop Work Authority procedures for any contractor is also critical, violations of
SWA is very serious. For this reason, it’s important to contact our attorneys as soon as
possible so we can collect and preserve evidence of those violations.

 If your employer or another party was negligent in causing your injury, we can help you
recover full compensation for everything you have lost by filing a personal injury lawsuit.
General safety precautions during excavations

To mitigate the risks associated with excavation work, it is essential to follow strict safety
precautions. Here are some vital measures to ensure a secure work environment:

When digging
Using slit trenches, it is Before any mechanical
excavation, it is essential A trial excavation is a
Proper crucial to use to carry out trial preliminary excavation
Detection of
shovels instead excavations to identify Trial Excavation to ensure the protection
Equipment of pickaxes to
Underground and protect underground for Protection of underground facilities
Facilities
for Slit avoid damage to
facilities effectively.
Metal or cable detectors
before proceeding with
mechanical excavation.
Trench underground can aid in this process.
utilities.
General safety precautions during excavations

Before When
To avoid injuries
commencing excavating near
from accidental
work in live existing building
contact with
plant areas like foundations, Maintaining
Temporary tools or
Gas Testing in refineries, gas temporary Adequate
Support for equipment,
Live Plant testing must be support must be Spacing
Existing workers should
Areas carried out provided to between
Foundations maintain
inside the ensure the Workers
adequate spacing
excavation to stability and
while working in
detect toxic or safety of
the excavation.
flammable gases. structures.
General safety precautions during excavations cont…

Implementing
appropriate soil For excavations Clear and visible
protection deeper than 3 barricades and
methods, such as Implementing meters, shoring or Providing excavation signs
Adapting Soil
stepping, sloping, Shoring or close sheeting Adequate must be installed
Protection
shoring, and close Sheeting for Deep must be in place to Barricades and to demarcate the
Methods
sheeting, can Excavations provide support Signage excavation site and
significantly and prevent soil warn people of
reduce the risk of collapse. potential hazards.
cave-ins.
General safety precautions during excavations cont…

Ladders used in
If the walking
excavations should Walkways across
distance inside the
be positioned at excavations should
excavation
least 1 meter be constructed
Providing exceeds 7.5
Ensuring Proper above the landing Using Safe using scaffolding,
Sufficient Means meters, there
Ladder level. If the Walkways across and jumping
of Access for should be at least
Placement excavation Excavations across the
Workers two means of
exceeds 1.2 excavation should
access for workers,
meters, two access be strictly
as per site-specific
points are prohibited.
guidelines.
required.
General safety precautions during excavations cont…

Maintaining Following
Distance for Confined If engine-driven For the safe operation of
Excavated soil, materials,
equipment is used inside Having a heavy equipment like
Excavated and equipment must be Space
kept at least 0.5 meters
an excavation, Signal Person excavators, dump trucks,
Soil, Conditions confined space and loaders, a certified
away from the edge of
conditions and safety with Heavy signal person with flags
Materials, the excavation to prevent for Engine protocols must be must be present to
accidental falls. Equipment
and Driven followed. coordinate movements.

Equipment Equipment
General safety precautions during demolition of
building:
 The safety precautions to be taken before demolition depends on method of
 demolition.
 Demolition methods include (1) manual demolition (2) mechanical demolition by
 pusher arm, demolition ball and wire rope pulling; explosives; demolition by hydraulic
 busters and the thermic lance.
 These used methods of demolition vary depending on types of buildings and
 structured such as houses, large buildings, bridges, arches, independent chimneys,
 steel and concrete structures, spires, pylons and masts, petroleum tanks etc.
 Any demolition work should be proceeded by
a. Site survey which should be comprehensive
b. Decide on the location and position of screens, scaffolds etc.,
c. Protection of the public
d. Methods to protect surrounding buildings from the danger of collapse.
e. Electric power to all services within the structures should be shut off. Similarly all )
f. Gas, water and steam service lines should be shut off.
g. The structure to be demolish should be adequately fenced and cordoned off
h. Display boards to be displayed prominently warning the public of the danger.
i. Glass in doors and windows, loose objects and projecting parts to be removed.
 SAFETY MEASURES IN DEMOLITION OF THE BUILDINGS:
 Workers should not be deployed at different levels unless adequate precautions are
 taken to ensure safety of them
 Demolition work should begin at the top of the structure and proceed downwards. .
 Masonry concrete and other dismantled materials should not be allowed to accumulate in quantities which
may endanger the stability of any floor or structural support.
 Part of the structures, where necessary should be adequately shored, braced or otherwise supported.
 If the structure is to be demolished by explosives, all safety measures pertaining to explosives such as
transport, storage, handling, loading firing etc. should be strictly adhered to.
 Foundation walls serving as retaining walls to support of adjoining structures should not be demolish until
the adjoining structure have been under pinned or braced or earth supported by sheet pilling.
 Stairs with hand railing should be kept in place as long as practicable to provide access and egress.
 SAFETY MEASURES IN DEMOLITION OF THE BUILDINGS:
• If the work of demolition is continued in night, all passageways, stairs and other parts of the
structure where the workers have to pass and also to work should be adequately lit.
• Workers should wear strictly safety belts, safety belts, safety helmets and hand glove.
• If the demolition is carried out by machines such as power shovels, bulldozers etc. the safety
measures relevant to operation and use of such machines should be adhered to.
• If swinging weight such as ball is used for demolition, a safety zone having a width of at least
1.50 times the height of the building or structure should be maintained.
• Scaffolds used for demolition operations should be independent of the structure to be
demolished.
• If ladders are used for demolition, only travelling mechanical ladders should be used.
• The hoists or chutes, whenever it is practicable, should be used to lower the materials.
Materials chutes should have a gate at the bottom with suitable means for regulating the flow
of materials.
 Safety measures in demolition of structural steel works:
• The steel structures should be demolished from top tier by tier.
• Removing the various members of the steel structures should be done in a planned manner.
• All precautions should be taken to prevent danger from any sudden twist, spring or collapse of
steel parts/work when it is cut or released.
• Structural steel parts should be carefully lowered and not dropped from a height.
• Safety precautions of gas cutting of the steel members should be adhered to.
 Safety measures in demolition of tall chimneys, miners, pylons etc.
 1. Tall chimneys, minars, pylons, etc., should not be demolished by overturning or
 blasting unless a protected area of an adequate dimension in which the chimney or
 the structure can fall safely..
 2. If the demolition of the tall structures are done by , blasting with explosives, it
 should be done with the services of specialized engineers . The entire operation
 should be under his supervision and control.

 Safety measures in demolition of Industrial Structures:

 1. The Safety measures in removing heavy and bulky machinery, plant and equipment
 should be observed in addition to some of the relevant safety measures already
 stated.
 2. If the industrial Structure such as a nuclear power station the services of the
 specialist expert in the field of radio-activity and radiation should be utilized.
  SAFETY ASPECTS IN PILE OPERATIONS
 1. Proper anchoring of the rig to firm base (anchor buried in ground etc).
 2. Wire ropes duly checked during erection and maintained on weekly basis.
 3. Workers climbing the rig for maintenance / concrete pouring to use full body harness and attach it to fall
arrestor if climbing up or down the rig.
 4. All workers to use ear plugs.
 5. Workers working with wire ropes should wear hand gloves and wear goggles to protect eyes from flying
iron particles from wire ropes.
 6. Sufficient wooden logs in good condition to be placed and ground leveled before moving rig.
 7. During rig movement only required persons to be around rest all to stay clear.
 8. Workers climbing for sling removal / concrete pouring to use full body harness and attach firmly.
 9. Proper rungs to be provided to one leg to enable worker to climb safely.
 10. One worker to be earmarked who will only climb the tripod – should wear full body harness at all times.
 11. Bentonite pit to be made at a safe distance away from the bore and properly connected to the bore by a
channel.
 12. Worker duly trained to start the winch by crank handle when required.
 13. While changing auger bucket due care to be taken to ensure proper locking.
 Working Safely with Concrete
 Concrete is easy to work with, versatile, durable, and economoicl. By taking a few basic
precautions, it is also one of the safest building materials known. Relatively few people
involved in mixing, handling, and finishing concrete have experienced injury.
 Outlined below are some simple suggestions-protection, prevention, common sense
precautions-useful to anyone working with portland cement and concrete. Workers should
also consult the last information from the U.S. Department of Labor
 Protect Your Skin
 When working with fresh concrete, care should be taken to avoid skin irritation or chemical
burns. Prolonged contact between fresh concrete and skin surfaces, eyes, and clothing may
result in burns that are quite severe, including third-degree burns. If irritation persists consult a
physician. For deep burns or large affected skin areas, seek medical attention immediately.
 Placing and Finishing
 Waterproof pads should be used between fresh concrete surfaces and knees, elbows, hands,
etc., to protect the body during finishing operations. Eyes and skin that come in contact with
fresh concrete should be flushed thoroughly with clean water. Clothing that becomes saturated
from contact with fresh concrete should be rinsed out promptly with clear water to prevent
continued contact with skin surfaces. For persistent or severe discomfort, consult a physician.
Project feasibility report
 A feasibility study is an evaluation and analysis of a project or system that somebody has proposed. We also call
it a feasibility analysis.
 The study tries to determine whether the project is technically and financially feasible, i.e., is it technically or
financially viable? Financially feasible, in this context, means whether the project is feasible within the estimated
cost.
 A feasibility study also determines whether a project makes good business sense, i.e., will it be profitable?
 Put simply; the study is an analysis of how easily or successfully we could complete something. It also tries to
determine how profitable or unprofitable it might be.
 When large sums of money are at stake, companies and organizations typically carry out feasibility studies.
 Executive s
ummary
Findings Description
and of
recommend product/ser
ations vice

Technology
Financial
projections
What Is considerati
Included in a ons
Feasibility
Study
Report?

Schedule Product/ser
vice market
place

Organizatio Marketing
n/staffing strategy
 The word ‘feasibility‘ means the degree or state of being easily, conveniently, or reasonably done. If something is
‘feasible,’ it means that we can do it, make it, or achieve it. In other words, it is ‘doable’ and also ‘viable.’
 A viable business, for example, is one we expect will make a profit every year for a long time.
 “The feasibility study focuses on helping answer the essential question of ‘should we proceed with the proposed
project idea?’ All activities of the study are directed toward helping answer this question.”
 A viability study is similar to a feasibility study. However, the viability study only looks at how profitable or
commercially successful an idea or project might be. It does not determine whether something is doable.
 A historical
background of
the project or
business.
Marketing resear Accounting
ch data and polic statements.
ies
.

A Good
Legal Feasibility Details of all the
operations and
Study Should
requirements.
management.

Provide:
A detailed
Tax implications
description of
and obligations.
what it is.

Financial data.
 Types of Feasibility Study

There are many things to consider when determining project feasibility, and there are different
types of feasibility studies you might conduct to assess your project from different perspectives.

 Pre-Feasibility Study
 A pre-feasibility study, as its name suggests, it’s a process that’s undertaken before the feasibility
study.
 It involves decision-makers and subject matter experts who will prioritize different project ideas or
approaches to quickly determine whether the project has fundamental technical, financial,
operational or any other evident flaws.

 Technical Feasibility Study

 A technical feasibility study consists in determining if your organization has the technical resources
and expertise to meet the project requirements.
 A technical study focuses on assessing whether your organization has the necessary capabilities that
are needed to execute a project, such as the production capacity, facility needs, raw materials,
 Economic Feasibility Study
• Also called financial feasibility study, this type of study allows you to determine whether a project is
financially feasible. Economic feasibility studies require the following steps:
o Before you can start your project, you’ll need to determine the seed capital, working capital and any other
capital requirements, such as contingency capital. To do this, you’ll need to estimate what types of
resources will be needed for the execution of your project, such as raw materials, equipment and labor.
o Identify potential sources of funding such as loans or investments from angel investors or venture
capitalists.
o Estimate the expected revenue, profit margin and return on investment of your project by conducting a
cost-benefit analysis, or by using business forecasting techniques such as linear programming to estimate
different future outcomes under different levels of production, demand and sales.
o Estimate your project’s break-even point.
o Conduct a financial benchmark analysis with industrial averages and specific competitors in your industry.
o Use pro forma cash flow statements, financial statements, balance sheets and other financial projection
documents.

 Legal Feasibility Study

 Your project must meet legal requirements including laws and regulations that apply to all activities and
 Market Feasibility Study
• A market feasibility study determines whether your project has the potential
to succeed in the market. To do so, you’ll need to analyze the following
factors:
• Industry overview: Assess your industry, such as year-over-year growth,
identify key direct and indirect competitors, availability of supplies and any
other trends that might affect the future of the industry and your project.
• SWOT analysis: A SWOT analysis allows organizations to determine how
competitive an organization can be by examining its strengths, weaknesses
and the opportunities and threats of the market.

• Market research: The main purpose of market research is to determine

whether it’s possible for your organization to enter the market or if there are
barriers to entry or constraints that might affect your ability to compete.
 7 Steps to Do a Feasibility Study
 1. Conduct a Preliminary Analysis
 2. Prepare a Projected Income Statement
 3. Conduct a Market Survey or Perform Market Research
 4. Plan Business Organization and Operations
 5. Prepare an Opening Day Balance Sheet
 6. Review and Analyze All Data
 7. Make a Go/No-Go Decision

https://www.projectmanager.com/training/how-to-conduct-a-feasibility-study
 ENGINEERING ECONOMY
INTRODUCTION TO BASIC ECONOMICS
 The word Economics has been derived from two Greek words, namely. Oikus and Nemein.
 Oikus means "household" and Nemein means "management".
 Economics is the science that deals with the production and consumption of goods and
services and the distribution and rendering of these for human welfare.
The following are the economic goals.
 A high level of employment
 Price stability
 Efficiency
 An equitable distribution of income
 Growth.
 ENGINEERING ECONOMY
INTRODUCTION TO BASIC ECONOMICS
 Management of money is critical for the success of any company. Therefore, a knowledge of
the role money plays in the day to day operations of a construction company is of the utmost
importance to a construction manager.
 Issues such as the borrowing of money, expenditure of money for expansion of company
operations. Construction firms acquire funds, as most individuals do, by borrowing money
from banks and similar lending resources.
 Definition of Engineering Economics
o Engineering economics deals with the methods that enable one to
make economic decisions towards evaluation of design and
engineering alternatives.
o It helps in examining the relevancy of a project, estimating its value
and justifying it from the engineering view point.
o Engineering economics provides methods that enable one to take
economic decisions towards minimizing costs and/or maximizing
benefits to business organizations.
o Engineers use the knowledge of engineering economy in performing
analysis, synthesizing and drawing conclusions as they work on
projects of all sizes.
 Definition of Engineering Economics
o The success of engineering and business projects is normally measured
in terms of financial efficiency. A project will be able to achieve
maximum financial efficiency when it is properly planned and
operated with respect to its technical, social, and financial
requirements.
o Engineers understand the technical requirements of a project, they can
combine the technical details of the project and the knowledge of
engineering economy to perform economy study to arrive at a sound
managerial decision.
CONCEPT OF ENGINEERING ECONOMICS

Science is a field of study where the basic principles of different physical systems are formulated and
tested.

Engineering is the application of science. It establishes varied application systems based on different
scientific principles.

Price has a major role in deciding the demand and supply of a product.

Hence, from the organization's point of view, efficient and effective functioning of the organization would
certainly help it to provide goods/services at a lower cost which in turn will enable it to fix a lower price
for its goods or services
 TIME VALUE OF MONEY
 The time value of money is important when one is interested either in
investing or borrowing the money.
 If a person invests his money today in bank savings, by next year he
will definitely accumulate more money than his investment.
 This accumulation of money over a specified time period is called as
time value of money.
o The time value of money is generally expressed by interest amount.
 Simple Interest
Simple Interest
Compound Interest
 COMPOUND INTEREST FORMULAE

1. Single-Payment Compound (FW)Amount

Single Payment
2. Single-Payment Present Worth Amount

1. Equal-Payment Series Compound Amount

2. Equal-Payment Series Sinking Fund

Equal Payment
3. Equal-Payment Series Present Worth Amount

4. Equal-Payment Series Capital Recovery Amount

1.Uniform Gradient Series Annual Equivalent Amount

Uniform Gradient Series
 1. Single-Payment Compound (FW)Amount
Here, the objective is to find the single future sum (F) of the initial payment (P) made at
time 0 after n periods at an interest rate i compounded every period. The cash flow diagram
of this situation is shown in Fig.

The formula to obtain the single-payment compound amount is

F = P(1 + i)n = P(F/P, i, n)

where,
( F/P, i, n) is called as single-payment compound amount
 2. Single-Payment Present Worth Amount
Here, the objective is to find the present worth amount (P) of a single future sum (F) which
will be received after n periods at an interest rate of i compounded at the end of every
interest period.
The corresponding cash flow diagram is shown in Fig,

The formula to obtain the present worth is

P = F / (1 + i)n = F(P/F, i, n)

Where, (P/F, i, n) is termed as single-payment present worth factor.

 1. Single-Payment Compound (FW)Amount

EXAMPLE 1. A person deposits a sum of Rs. 20,000 at the interest rate of 18%
compounded annually for 10 years. Find the maturity value after 10 years.

Solution :
P = Rs. 20,000
i = 18% compounded annually
n = 10 years
F = P(1 + i)n
= 20,000(1+0.18)10
= 20,000 X 5.234
= Rs. 1,04,676
The maturity value of Rs. 20,000 invested now at 18% compounded yearly is
equal to Rs. 1,04,676 after 10 years.
 Example 2 : Suppose that Rs. 100 is invested at 5% interest
compounded annually for 20 years. How much will be in the
account after 20 years.
F = P(1 + i)n
 2. Single-Payment Present Worth Amount
EXAMPLE 1. A person wishes to have a future sum of Rs. 1,00,000 for his son’s education after
10 years from now. What is the single-payment that he should deposit now so that he gets the
desired amount after 10 years? The bank gives 15% interest rate compounded annually.
Solution
F = Rs. 1,00,000
i = 15%, compounded annually
n = 10 years
P = F/(1 + i)n
P = 1,00,000 / (1+0.15)10
= 1,00,000 / 4.045
= Rs. 24,722
The person has to invest Rs. 24,722 now so that he will get a sum of Rs. 1,00,000 after 10
years at 15% interest rate compounded annually.
Example 2 : How much sold be invested now at 5%
compounded annually to accumulate Rs. 1,000 at the end
of 5 years ?
P = F/(1 + i)n
 1. Equal-Payment Series Compound Amount
In this type of investment mode, the objective is to find the future
worth of n equal payments which are made at the end of every
interest period till the end of the nth interest period at an interest rate
of i compounded at the end of each interest period. The corresponding
cash flow diagram is shown in Fig.

A = equal amount deposited at the end

of each interest period.
n = No. of interest periods.
i = rate of interest.
F = single future amount.
EXAMPLE 1: A person who is now 35 years old is planning for his
retired life. He plans to invest an equal sum of Rs. 10,000 at the end
of every year for the next 25 years starting from the end of the next
year. The bank gives 20% interest rate, compounded annually. Find
the maturity value of his account when he is 60 years old.
Solution :
A = Rs. 10,000
n = 25 years
i = 20%
F=?
The corresponding cash flow diagram is shown in Fig.
 F = 10,000 X [{(1+0.20)25-1} / 0.20]

F = 10,000 X 471.981
F = Rs. 47,19,810.83
The future sum of the annual equal payments after 25 years is
equal to Rs. 47,19,810.
EXAMPLE 2 : Mr. X is planning to build his own house. He plans
to deposits Rs.40,000/- every year for next 10 years in a bank. The
bank gives 12% Interest rate compounded annually. Find the
maturity value of his account after 10 years.
 2. Equal-Payment Series Sinking Fund

In this type of investment mode, the objective is to find the equivalent

amount (A) that should be deposited at the end of every interest period
for n interest periods to realize a future sum (F) at the end of the nth
interest period at an interest rate of i.

A = equal amount to be deposited

at the end of each interest period
n = No. of interest periods
i = rate of interest
F = single future amount at the
end of the nth period
EXAMPLE 1: A company has to replace a present facility after 15
years at an outlay of Rs. 5,00,000. It plans to deposit an equal amount
at the end of every year for the next 15 years at an interest rate of
18% compounded annually. Find the equivalent amount that must be
deposited at the end of every year for the next 15 years.
Solution :
F = Rs. 5,00,000
n = 15 years
i = 18%
A=?
The corresponding cash flow diagram is shown in Fig
 A = 5,00,000 X [0.18 / ((1+0.18)15 – 1)]

A = 5,00,000 X 0.0164
A = Rs. 8,201

The annual equal amount which must be deposited for

15 years is Rs. 8,201.
EXAPLE 2 : A financial institution introduces a plan to pay a sum of
Rs. 15,00,000 after 10 years at the rate of 18%, compounded
annually. Find the annual equivalent amount that a person should
invest at the end of every year for the next 10 years to receive Rs.
15,00,000 after 10 years from the institution.
 3. Equal-Payment Series Present Worth Amount
The objective of this mode of investment is to find the present worth of an equal
payment made at the end of every interest period for n interest periods at an
interest rate of i compounded at the end of every interest period.
The corresponding cash flow diagram is shown in Fig.

P = present worth
A = annual equivalent payment
i = interest rate
n = No. of interest periods
EXAMPLE 1 : A company wants to set up a reserve which will help
the company to have an annual equivalent amount of Rs. 10,00,000
for the next 20 years towards its employees welfare measures. The
reserve is assumed to grow at the rate of 15% annually. Find the
single-payment that must be made now as the reserve amount.
Solution
A = Rs. 10,00,000
i = 15%
n = 20 years
P=?
The corresponding cash flow diagram is illustrated in Fig.
 P = 10,00,000 X [ ((1+0.15)20 - 1) / (0.15 X (1+0.15)20 )]
P = 10,00,000 X [ 15.366 / 2.455]
P = 10,00,000 X 6.2591
P = Rs. 62,59,063.136
The amount of reserve which must be set-up now is equal to
Rs. 62,59,063.
EXAMPLE 2 :A company wants to set-up a reserve which will help
it to have an annual equivalent amount of Rs. 15,00,000 for the next
20 years towards its employees welfare measures. The reserve is
assumed to grow at the rate of 15% annually. Find the single-payment
that must be made as the reserve amount now.
 4. Equal-Payment Series Capital Recovery Amount
The objective of this mode of investment is to find the annual
equivalent amount (A) which is to be recovered at the end of every
interest period for n interest periods for a loan (P) which is
sanctioned now at an interest rate of I compounded at the end of
every interest period.

P = present worth (loan amount)

A = annual equivalent payment
(recovery amount)
i = interest rate
n = No. of interest periods
EXAMPLE 1: A bank gives a loan to a company to purchase an
equipment worth Rs. 10,00,000 at an interest rate of 18%
compounded annually. This amount should be repaid in 15 yearly
equal installments. Find the installment amount that the company has
to pay to the bank.
Solution :
P = Rs. 10,00,000
I = 18%
n = 15 years
A=?
 A = 10,00,000 [ ( 0.18 (1+0.18)15 ) / ((1+0.18)15 – 1) ]
A = 10,00,000 [ 2.155 / 10.973 ]
A = 10,00,000 [ 0.1964]
A = Rs. 1,96,391.142
The annual equivalent installment to be paid by the company to
the bank is Rs. 1,96,391.
EXAMPLE 2 :A bank gives loan to a company to purchase an
equipment which is worth of Rs. 5,00,000, at an interest rate of 18%
compounded annually. This amount should be repaid in 25 yearly
equal installments. Find the installment amount that the company has
to pay to the bank.
 Uniform Gradient Series Annual Equivalent Amount
The objective of this mode of investment is to find the annual
equivalent amount of a series with an amount A1 at the end of the
first year and with an equal increment (G) at the end of each of the
following n – 1 years with an interest rate i compounded annually.
The corresponding cash flow diagram is shown in Fig.
EXAMPLE 1: A person is planning for his retired life. He has 10
more years of service. He would like to deposit 20% of his salary,
which is Rs. 4,000, at the end of the first year, and thereafter he
wishes to deposit the amount with an annual increase of Rs. 500 for
the next 9 years with an interest rate of 15%. Find the total amount
at the end of the 10th year of the above series.
Solution : Here,
A1 = Rs. 4,000
G = Rs. 500
I = 15%
n = 10 years
A=?&F=?
A = 4,000 + 500 x [{(1+0.15)10 – (0.15 x 10) – 1 } / {((0.15 x (1+0.15)10) – 0.15}]

A = 4,000 + 500 x [1.5455 / 0.4568]

A = 4,000 + 500 x 3.383

A = Rs. 5,691.5
This is equivalent to paying an equivalent amount of Rs. 5,691.50 at
the end of every year for the next 10 years. The future worth sum of
this revised series at the end of the 10th year is obtained as follows:

F = 5,691.5 x {((1+0.15)10 – 1) / 0.15}

F = 5,961.5 X {3.0455/0.15}

F = 5,691.5 X 20.303

F = Rs. 1,15,556.42
Example 2 : A person is planning for his retired life. He has 10 more
years of service. He would like to deposit 20% of his salary, which is
Rs. 10,000, at the end of the first year and thereafter he wishes to
deposit the same amount (Rs. 10,000) with an annual increase of Rs.
2,000 for the next 9 years with an interest rate of 20%. Find the total
amount at the end of the 10th year of the above series.
Effective Interest Rate
Let i be the nominal interest rate compounded annually. But, in practice, the compounding may occur less
than a year. For example, compounding may be monthly, quarterly, or semi-annually. Compounding
monthly means that the interest is computed at the end of every month.
 Under such situations, the formula to compute the effective interest rate, which is compounded annually, is
R = (1 + i/C )C – 1
EXAMPLE 1. A person invests a sum of Rs. 5,000 in a bank at a nominal interest rate of 12% for
10 years. The compounding is quarterly. Find the maturity amount of the deposit after 10 years.

Solution
P = Rs. 5,000
n = 10 years
i = 12% (Nominal interest rate)
F=?
METHOD 1
No. of interest periods per year = 4
No. of interest periods in 10 years = 10 × 4 = 40
Revised No. of periods (No. of quarters), N = 40
Interest rate per quarter, r = 12%/4
= 3%, compounded quarterly.

F = P(1 + r)N = 5,000(1 + 0.03)40

= Rs. 16,310.19
METHOD 2

No. of interest periods per year, C = 4

Effective interest rate, R = (1 + i/C )C – 1

= (1 + 12%/4)4 – 1
= 12.55%, compounded annually.

F = P(1 + R)n = 5,000(1 + 0.1255)10

= Rs. 16,308.91
Example 2 :A person invests a sum of Rs. 50,000 in a bank
at a nominal interest rate of 18% for 15 years. The
compounding is monthly. Find the maturity amount of the
deposit after 15 years.
 BASES FOR COMPARISON OF ALTERNATIVES

In most of the practical decision environments, executives

will be forced to select the best alternative from a set of
competing alternatives.
Let us assume that an organization has a huge sum of
money for potential investment and there are three different
projects whose initial outlay and annual revenues during
their lives are known.
The executive has to select the best alternative among these
three competing projects.
There are several bases for comparing the worthiness of the
projects. These bases are:

1. Present worth method

2. Future worth method
3. Annual equivalent method
4. Rate of return method
 PRESENT WORTH METHOD OF COMPARISON

 In this method of comparison, the cash flows of each alternative will be reduced to
time zero by assuming an interest rate i. Then, depending on the type of decision,
the best alternative will be selected by comparing the present worth amounts of the
alternatives.

 In a cost dominated cash flow diagram, the costs (outflows) will be assigned with
positive sign and the profit, revenue, salvage value (all inflows), etc. will be
assigned with negative sign.

 In a revenue/profit-dominated cash flow diagram, the profit, revenue, salvage

value (all inflows to an organization) will be assigned with positive sign. The costs
(outflows) will be assigned with negative sign.
In case the decision is to select the alternative with the
minimum cost, then the alternative with the least present
worth amount will be selected.
On the other hand, if the decision is to select the
alternative with the maximum profit, then the
alternative with the maximum present worth will be
selected.
 REVENUE-DOMINATED CASH FLOW DIAGRAM

+S

Finally, the alternative with the maximum present worth amount

should be selected as the best alternative.
 COST-DOMINATED CASH FLOW DIAGRAM

-S

Finally, the alternative with the minimum present worth

amount should be selected as the best alternative.
EXAMPLE 1 : Alpha Industry is planning to expand its production operation. It
has identified three different technologies for meeting the goal. The initial outlay
and annual revenues with respect to each of the technologies are summarized in
below Table. Suggest the best technology which is to be implemented based on the
present worth method of comparison assuming 20% interest rate, compounded
annually.
Initial outlay ( Rs.) Annual Revenue (Rs.) Life (Years)
Technology 1 12,00,000 4,00,000 10
Technology 2 20,00,000 6,00,000 10
Technology 3 18,00,000 5,00,000 10

Solution : In all the technologies, the initial outlay is assigned a negative sign and the
annual revenues are assigned a positive sign.
I ) TECHNOLOGY 1
Initial outlay, P = Rs. 12,00,000
Annual revenue, A = Rs. 4,00,000
Interest rate, i = 20%, compounded annually
Life of this technology, n = 10 years
The cash flow diagram of this technology 1 is as shown in Fig.

+S

PW1 = –12,00,000 + 4,00,000 X [((1+0.20)10 – 1)/ (0.20 X (1+0.20)10)] + 0

= –12,00,000 + 4,00,000 X [5.1914/1.2383]
= –12,00,000 + 4,00,000 X (4.1925)
= Rs. 4,77,000
II ) TECHNOLOGY 2
Initial outlay, P = Rs. 20,00,000
Annual revenue, A = Rs. 6,00,000
Interest rate, i = 20%, compounded annually
Life of this technology, n = 10 years

+S

PW2 = –20,00,000 + 6,00,000 X [((1+0.20)10 – 1)/ (0.20 X (1+0.20)10)] + 0

= –20,00,000 + 6,00,000 X [5.1914/1.2383]
= –20,00,000 + 6,00,000 X (4.1925)
= Rs. 5,15,500
III ) TECHNOLOGY 3
Initial outlay, P = Rs. 18,00,000
Annual revenue, A = Rs. 5,00,000
Interest rate, i = 20%, compounded annually
Life of this technology, n = 10 years

+S

PW3 = –18,00,000 + 5,00,000 X [((1+0.20)10 – 1)/ (0.20 X (1+0.20)10)] + 0

= -18,00,000 + 5,00,000 X [5.1914/1.2383]
= –18,00,000 + 5,00,000 X (4.1925)
= Rs. 2,96,250
From the above calculations, it is clear that the present worth of technology 2 is the highest
among all the technologies. Therefore, technology 2 is suggested for implementation to expand
the production.
Example 2 : An engineer has two bids for an elevator to be installed in a new building. The
details of the bids for the elevators are as follows:

Determine which bid should be accepted, based on the present worth method of
comparison assuming 15% interest rate, compounded annually.
Solution
Bid 1: Alpha Elevator Inc. -S
Initial cost, P = Rs. 4,50,000
Annual operation and maintenance cost, A = Rs. 27,000
Life = 15 years
Interest rate, i = 15%, compounded annually.
 -S
PW(15%) = 4,50,000 + 27,000 X 5.8474

PW(15%) = Rs. 6,07,879.80

Bid 2: Beta Elevator Inc.
Initial cost, P = Rs. 5,40,000
Annual operation and maintenance cost, A =
Rs. 28,500
Life = 15 years
Interest rate, i = 15%, compounded annually.

PW(15%) = 5,40,000 + 28,500 X 5.8474

PW(15%) = Rs. 7,06,650.90
The total present worth cost of bid 1 is less than that of bid 2. Hence, bid 1 is to be selected for
implementation. That is, the elevator from Alpha Elevator Inc. is to be purchased and installed
in the new building.
 FUTURE WORTH METHOD
In the future worth method of comparison of alternatives, the future worth of
various alternatives will be computed. Then, the alternative with the maximum
future worth of net revenue or with the minimum future worth of net cost will be
selected as the best alternative for implementation.
A ) REVENUE-DOMINATED CASH FLOW DIAGRAM

FW(i) = –P(1 + i)n + +S

If we have some more alternatives which are to be compared with this alternative, then the
corresponding future worth amounts are to be computed and compared. Finally, the
alternative with the maximum future worth amount should be selected as the best
alternative.
 B ) COST-DOMINATED CASH FLOW DIAGRAM

FW(i) = +P(1 + i)n + -S

In this formula, the expenditures are assigned with positive sign and revenues with negative
sign. If we have some more alternatives which are to be compared with this alternative, then
the corresponding future worth amounts are to be computed and compared. Finally, the
alternative with the minimum future worth amount should be selected as the best alternative.
Annual Equivalent Method
Rate of Return Method
 The rate of return of a cash flow pattern is the interest rate at which the present worth of that cash
flow pattern reduces to zero.
 In this method of comparison the rate of return for each alternative is computed.
 Then the alternative which has the highest rate is selected as the best alternative.
 In this type of analysis, the expenditures are always assigned with a negative sign and
revenues/inflows are assigned with a positive sign.
 The cash flow diagram is indicated below.

In the above cash flow diagram P represents the initial

investment, Rj the net revenue at the end of the jth
year and S is the Salvage value at the end of the nth
year.
The first step is to find the net present worth of the
cash flow diagram, using the following expression at a
given rate of interest i,
Break Even Analysis
 Break even analysis examines the relationship between the total revenue , total costs and total profits
of the firm at various levels of output.
 It is used to determine the sales volume required for the firm to break even and the total profits and
losses at other sales level.
 Break even analysis is a method, as said by Dominick Salnatore, of revenue and total cost functions
of firm.
 In case of point break analysis the break point is of particular importance.
 Break even point is that volume of sales where the firm breaks even, the total costs equal to revenue.
It is therefore a point where losses cease to occur while profits have not yet begun. That is the point
of zero profit
The conclusion that can be drawn from the above
example is that sales volume of 5000 units will be
the accurate point at which the manufacturing unit
would not make any profit or loss
USES
 Break even analysis is a very generalized approach for dealing with a wide variety of questions
associated with profit planning and forecasting. Some of the important practical applications of break
even analysis are
 What happens to overall profitability when a new product is introduced?
 What level of sale is needed to cover all costs and earn saving Rs. 100000 profit or a 12% rate of
return?
 What happens to revenues and costs if the price of one of a company’s product is hanged?
 What happens to overall profitability if a company purchases new capital equipment or incurs higher
or lower fixed or variable costs?
 Between two alternatives which one offers greater margin of profit (Safety)?
 What are the revenue and implications of changing the process of production?
 Should one make, buy or lease capital equipment?